Submitted by Taps Coogan on the 19th of September 2018 to The Sounding Line.
Ray Dalio, co-chairman and founder of Bridgewater Associates, recently gave an interview to Bloomberg, to discuss his new book ‘A Template for Understanding Big Debt Crises’ (it can be downloaded for free here). Mr. Dalio adds to his recent interview with CNBC and warns about looming social, political, and currency crises in the next ‘inevitable’ economic downturn.
Mr. Dalio on the next economic downturn:
“The (next) downturn will be very different than the one in 2008. It will be one in which, I think, the social and political problems will be great because of that wealth gap and populism and I think there will be more conflict. Right now times are good and we’re sort of at each others throats now. I also worry about the effectiveness of monetary policy in reversing that because monetary policy has interest rates, and we can’t lower interest rates as much, and it has quantitative easing, the purchases of financial assets to push other financial assets out and get liquidity in the system, and that is at its maximum. So when we have a downturn, we’re not going to have (monetary policy) as effective. I also think the downturn… won’t just be debts. It will also be pension obligations, healthcare obligation, unfunded obligations… and I think it will be about us having to sell a lot of treasury bonds to the rest of the world and I think that will also be an issue about two years out. So I would say two years out is when I am worried about”
“I don’t think (the next downturn) is going to be as sharp and severe like (the 2008 crisis). I think it’s more going to grind on… All of these obligations will be a problem to be funded and I think it will be more of… a dollar crisis than a debt crisis… When we have to sell a lot of treasury bonds… and we as Americans will not be able to buy all of those treasury bonds, and if interest rates rise too much, the way it usually works is that that constricts credit. We borrow less and that creates weakness in the economy. So instead, because we’ll sell to foreigners, from a foreign perspective… they care not about inflation, they care about currency depreciation when they look at the interest rate. So if a currency goes down, the bonds become cheaper. I think the Federal Reserve, at that point, will have to print more money to make up for the deficit… and that that will cause a depreciation in the value of the dollar… We have the privileged position of being able to borrow in our own currency because we have the world’s leading reserve currency. I think we are risking that by our finances. In other words borrowing too much.”
There is much more to the interview so enjoy it above.
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